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Marginal thinking: Long-term approach to decision-making

Elliot Block Published on 24 June 2011

No matter the market conditions – from high-priced feed to low milk price – dairy producers make money by increasing income or lowering cost (or both).

While we have become very focused on the cost side of the equation, the ultimate goal for the dairy operation should be to generate more profits. One way producers can more effectively do this is by utilizing marginal thinking in decision-making situations.

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It is almost always more profitable to focus on the income side rather than to try and decrease expenses on the dairy. Additional milk production from an existing cow only costs the extra nutrients for milk production, since the fixed maintenance feed costs are already being covered. Focusing on that additional production from each cow is the basis of marginal thinking.

Use two numbers to think marginally

To effectively implement marginal thinking, identify two numbers related to feed costs:

1. Average maintenance cost per cow per day. The best way to measure this number is to look at the cost of the dry cow ration. This nonlactating animal is using feed for daily maintenance needs.

2. Additional feed cost per hundredweight of marginal milk. This number will identify the additional investment needed to generate milk production.

Looking at a hypothetical example, let’s assume the cost of feeding a cow producing 88 lbs of milk is $6.46 and the cost of feeding a dry cow is $2.50. That means the feed cost to support the 88 lbs of production is $3.96 ($6.46 - $2.50 = $3.96). If it costs $3.96 to support 88 lbs of production, then each pound of marginal milk costs $0.045 for the feed ($3.96/88 lbs).

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By using the formula above, the cost of feeding at varying production levels can be calculated to determine the financial impact of the change. Using milk price information, income over feed costs (IOFC) can also be calculated to determine the benefits of such change above and beyond the initial investment.

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Doing the math: Marginal thinking in action

Marginal thinking can ultimately result in greater profits for the dairy. In Table 1 a dairy producer is implementing a ration change to increase milk production. The additional feed cost is captured in the “Feed cost for marginal milk” row.

Regardless of production levels, the maintenance feed costs are the same across all groups, so our focus should be on the feed cost for marginal milk – the additional cost needed to support higher production.

As Table 1 illustrates, the cow producing 70 lbs of milk costs the dairy producer $5.65 in feed costs per day, while the cow making 90 lbs of milk costs the producer $6.55, a $0.90 increase.

The 90-lb cow produces 20 more lbs of milk compared to the 70-lb cow, resulting in an additional $3.20 of milk revenue cost when compared. This far exceeds the $0.90 investment in feed cost, for an IOFC improvement of $2.30.

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Feeding cows with a marginal mindset

For producers looking to take their nutrition program to the next level, it may mean incurring additional costs upfront, but this investment can result in greater production and profit potential.

To generate the greatest revenue through marginal thinking, you must be willing to:

  • Invest in the ration. Rather than trying to identify which feeds can be removed to quickly shrink feed bills, think of the ration as an investment. The ration delivered to the feedbunk must allow cows to maximize production, remain healthy and become bred in a timely manner.
  • Utilize high-quality, proven ingredients. Research-proven feed ingredients play a pivotal role in marginal thinking, ensuring the added investment in the ration will translate to greater profit potential for your operation. Identify feed ingredients backed by extensive research to ensure consistent results can be seen on your dairy.
  • Break from the cost-cutting mentality. The effects of cutting quality ingredients have long-term implications, including lost production that cannot be regained and negative impacts on herd health and reproduction. Taking shortcuts can jeopardize the herd’s ability to continually meet your goals, ultimately decreasing profitability.
  • Make a change. Continually evolving the diet ensures cows are performing optimally and the ration needed for success is provided. Evaluate each change independently to understand the marginal cost of the change and the long-term benefits for the herd.
  • Work with your nutritionist to properly balance the ration. Your nutritionist can provide sound insight into how to properly balance the diet to maximize production and IOFC. Work with your nutritionist to outline the estimated maintenance feed costs and the costs that result in even greater milk production profit for your operation. PD

References omitted due to space but are available upon request to .

Elliot Block
  • Elliot Block

  • Senior Manager of Technology
  • Arm & Hammer Animal Nutrition
  • Email Elliot Block

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